FMA held to be in breach of its natural justice obligations

Friday 2 October 2015

Authors: Sophie East and Jane Standage

​​​​A recent High Court judgment provides useful guidance on due process that ought to be followed when the FMA is exercising its statutory po​wers.​​

The judgment was a setback for the Financial Markets Authority (FMA), with the High Court overturning the FMA’s attempt to exercise its new power to deregister a Financial Service Provider (FSP). The Court did so on the grounds that the FMA breached the FSP’s (Vivier’s) right to natural justice (see Vivier and Company v Financial Markets Authority [2015] NZHC 2337). The case is the first time a Court has considered the new deregistration power, and the Court took the opportunity to clarify the grounds for deregistration and the process the FMA ought to follow.

On what basis did the FMA proceed?

Under the Financial Services Providers (Registration and Dispute Resolution) Act 2008 (the Act), all FSPs with a place of business in New Zealand must be registered in order to provide financial services to retail clients (even if all the FSP’s financial services are provided overseas). Although Vivier only dealt with clients residing outside New Zealand, it had physical offices and personnel in New Zealand and therefore was required to be registered as an FSP in New Zealand. However, the new section 18A of the Act provides the FMA with a power to deregister an FSP (even where that FSP has a place of business in New Zealand) where the FSP’s registration creates a misleading impression as to the extent to which it is licensed or regulated by New Zealand law or where the registration damages the reputation and integrity of New Zealand’s financial markets.

Following receipt of a complaint and an article from an Irish newspaper accusing Vivier of engaging in tax fraud and money laundering,1 the FMA decided that this information might warrant deregistration of Vivier as an FSP under s 18A. The FMA sent Vivier a notice of intention to deregister but failed to disclose the fact that a specific complaint had been received regarding Vivier’s registration and that the complaint was based on an Irish newspaper article. Vivier responded to the notice of intention to deregister and provided further information in opposition to the FMA’s intention to deregister. Despite this additional information, the FMA directed that Vivier be deregistered as an FSP. Vivier appealed this decision to the High Court.

The High Court judgment

The High Court considered the requirements for a valid direction to deregister under s 18A of the Act and held that:

  • It is insufficient for the FMA to rely solely on the fact that an FSP does not provide services in or from New Zealand in order to decide that deregistration is necessary or desirable. The Court noted that by law, FSPs with a place of business in New Zealand must be registered even if all of their financial services are provided overseas. Thus, deregistration cannot hinge solely on the fact that the FSP only provides financial services overseas.

  • To reach the relevant threshold for deregistration, it must be shown that the “FSP, by virtue of the fact of its registration, creates a misleading appearance as to the extent to which it is licensed or regulated by New Zealand law, or otherwise damages the reputation and integrity of New Zealand’s financial markets.” 

The Court held that the FMA must ask itself whether it has sufficient information to enable it to make the statutory determination and if it does not, then the rules of natural justice require the FMA to make further inquiry before reaching a decision. The Court found that the FMA had not properly considered Vivier’s opposition and had seen it as irrelevant even though Vivier’s opposition raised “real issues with the reliability of the information that the FMA had in its possession”. The Court concluded that the FMA did not have a sufficient basis to properly weigh the considerations before it reached the conclusion that Vivier should be deregistered.

In addition, the Court found that the FMA should have advised Vivier in its notice of intention to deregister that a specific complaint had been received regarding Vivier’s registration and the basis for that complaint (the Irish newspaper article). The Court stated that natural justice requires the FMA to disclose sufficient information to allow the affected party to respond to the essential issues (like the complaint).

The Court also provided guidance on what information should form part of a notice of intention to deregister. The notice must:

  1. ​​​State why, pursuant to s 18A of the Act, it is necessary and desirable to consider the FSP’s deregistration (i.e. that the registration creates a misleading impression as to the extent to which it is licensed or regulated by New Zealand law or the registration damages the reputation and integrity of New Zealand’s financial markets).
  2. Set out all the relevant supporting evidence that the FMA has relied on to come to the above conclusion.

  3. Give reasons why the relevant supporting evidence has led the FMA to conclude that the grounds for deregistration under s 18A have been made out.

Comment

The case provides helpful guidance not just to the FMA, but to companies dealing with the FMA as to due process that ought to be followed when the FMA is exercising its statutory powers. This may have application beyond the power of deregistration under s 18A. For example, this case may be relevant to the FMA’s powers to make a range of orders including stop orders and direction orders under the Financial Markets Conduct Act 2013 (s 475 of that Act specifies similar natural justice rights that must be observed before the FMA can make these orders).


1​ And additional information collected by other New Zealand government departments.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Sophie East

    Partner Auckland
Related areas of expertise
  • Litigation and dispute resolution